There are many forms of capitalism. What we have right now is bubble capitalism, whereby a new bubble in some non-manmade resource (oil, land etc.) is used to speculate enourmous sums to a very tiny minority of early investors.
This is also Ponzi Capitalism. Or, perhaps, since banks have become a de facto fourth branch of goverment, Crony Capitalism. Certainly, these forms of capitalism are unsustainable.
Here's an alternative: Geonomic Capitalism.
Tax all the non-manmade resources: oil, land, pollution of air/water/land etc. and untax the fruits of production (wages, capital like factories, cranes, trucks etc.). This would prevent speculation by taxing away the "fuel" for it, on land, natural resources, etc, and distributing that back to the comunity (to whom the resources rightfully belong. Exxon did not make the oil in the ground, did they?).
Production would be encouraged by untaxing the rewards of that, but consumption of scarce resources would be discouraged by taxing the raw materials.
Of course, this is not enough. We need serious regulation too.
The best idea for banking I've seen is the Central Bank of North Dakota (North Dakota is one of only four states to run a surplus this year), which aggregates the revenues of the state and is controled by the Governor, Attorney General and (in that agricultural state), the Secretary of Agriculture.
The main thing is they don't take any money from Wall Street, nor do they sell off their mortgages to them. They do distribute money downward to other banks in the state, but only what they actually have, plus about 9/10 more when making a loan. This limited form of fractional banking has worked for centuries simply because when labor acts upon the resources of the world, aided by capital, new wealth is created - a lot of it.
Think of the value a new bridge adds to a community, for example, or a new building where people can work for 60 years and produce even more wealth. One actually doesn't need capital to create wealth; I could tear down trees and create a bridge with my bare hands, but it sure goes faster and better if I can use a crane and manufactured steel - these are both forms of capital.
Money, or, even worse, electronic money, has no value, and is merely a medium of exchange. The confusion in this last category of exchange for actual wealth is what has led to the present difficulties.
When the risk is separated from those making the loans, and vast fees are collected without the lenders having "skin in the game" there is no incentive to be prudent making loans. This is even more true when those "lenders" - who are really middlemen just facilitating lending by other, hidden parties - are bailed out when they fail, or the hidden lenders are.
This has to stop and we have to go back to lenders lending money they have, or at least a reasonably sized fraction of it (1/10 is reasonable, based on historic standards and experience, 1/100 of capital reserves is not).
As for the current crisis, the President should come out and say the Credit Default Swaps, worth some $56 Trillion, were made on fraudulently assessed collateral, and that both parties knew this.
The reason for AIG to make these bets is obvious - they collect the fees. But the couterparties are also engaged in a gaming expectations when theytake out uncolateralized insurance in order to garner AAA ratings from suspect agencies, which nevertheless lower the counterparty's borrowing costs. (Plus, it is now becoming clear from George Soros and others), that the counterparties actively bet against the companies that were insured by shorting them in the open market in order to trigger defaults on the CDSes they bought from AIG.
In this case, the fraud is one of commission rather than omission. In any case, the President should declare these derivative side bets null and void - all of them - so that we can "reset the clock."
This would fairly eliminate these massive derivative overhangs, whichno one can pay, and which regulatory authorities should never have allowed in the first place. It was under the Bush administration that regulation was deliberately superceded and suspended in a series of laws and deregulations.
This policy has to be dramatically reversed to eliminate the concept of "too big to fail."